Taxing What We Don’t Want, Instead of What We Want

By Donella Meadows

–January 14, 1993—-

In spite of the wisecracks we all like to make about government, we know that if we didn’t have one, we would slowly — or maybe not so slowly — devolve to the hapless condition of a Bosnia or Somalia. We need government. So we have to pay for it. So we have to tax something.

But we don’t have to tax things we want, such as income, profit, or capital gains. Taxes on the proceeds of investment reduce the incentive to invest. Taxes on wages reduce the incentive to work. Why not reduce the incentive to produce something we don’t want — such as pollution?

The Clinton-Gore White House is going to be taking the idea of pollution taxes very seriously, especially a tax on carbon.

Why carbon? From a revenue-raising point of view, because there’s so much carbon to tax. Oil, gas, and coal flow through our economy in enormous quantities. Each $100 per ton assessed on the carbon in fossil fuels would, at present rates of use, bring in $120 billion per year, about one-tenth our current government budget. A carbon tax would be fairly easy to collect, because it could be levied at the point of production or import of each fuel — at coal mines, oil wells, gas wells, and incoming tankers. That would be much simpler than collecting at every point of pollution emission — every tailpipe and smokestack in the nation.

From a pollution-reducing point of view, carbon should be taxed because when it is burned, it produces carbon dioxide, the primary greenhouse gas. Fossil-fuel burning also produces the acids in acid rain and most of the choking chemicals in urban smog — and oil spills, strip mines, black lung disease, a negative balance of payments, and the need to defend the Persian Gulf. Reduction of any of these things would be of both ecological and economic benefit.

A carbon tax could help the economy twice over. First, it would correct what economists call an “externality” — a cost created by the actions of some that gets shoved off onto others to pay. In this case those who incur the cost are all fuel-users, which means all of us, but particularly those who drive gas-guzzling cars, who heat or cool big, uninsulated houses, who consume the most. The “others” who pay include, again, everyone, since we all breathe smog and suffer acid rain, and no one on earth will escape a climate change. But those who suffer more than their share of the externalities of fossil fuel use are the poor of the present and all the people of the future.

The way to correct this externality is to charge, through a tax, the full cost of carbon-burning right up front. Then purchasers of fuel-intensive products will get a clear signal about the consequences of their choice. They will see a payoff in buying cars with better mileage, turning out unnecessary lights, investing in solar energy. Businesses will seek out the cheapest ways of reducing fuel use, up to the point where the cost of further reduction equals the tax rate. The market will allocate pollution reduction to the places where it can be done least expensively.

That’s economic improvement number one: justice and efficiency. Improvement number two is, surprisingly: growth and jobs. The distorting effect of taxes on wages and investment is major. Each dollar of income and capital gains tax costs the economy another 30-40 cents in reduced economic activity. If a carbon tax replaced some or all of these distorting taxes, it could benefit the economy so much, some analysts think, that it would increase the GNP growth rate. Because of the tax, that growth would be in fuel-efficient activities, not fuel-squandering ones.

There are two problems with a carbon tax, one of which is political. Consumers will experience a carbon tax as a jump in the price of almost everything. Saying that the cost was always there, we’re just finally making it visible and charging it fairly, will not make it any more popular. Producers — the coal, oil, and gas industries — are always enthusiastic about the free market until you talk about internalizing THEIR externalities. Then they fight with all the power they’ve got. Even in a Clinton administration, they’ve got a lot of power.

The other problem with a carbon tax is that the more effective the tax is in inducing the nation to shift toward energy efficiency and renewable energy, the less money it will raise. If we’re going to keep a government going, we’ll have to raise the tax over time.

A steady rise in carbon tax would be tolerable, if it happened predictably enough for business and consumers to plan their energy-related investments. (What kind of furnace would you install, if you knew oil and gas would double in price over the next ten years? What kind of car would you buy, if gas were on its way up to five dollars a gallon?) Setting the tax at just the right place — not so high that it suppresses the economy, not so low that it fails to protect the environment (or fund the government) — would be tricky. But then, deciding the proper rate of any tax is tricky.

Denmark, Sweden, Finland, and the Netherlands have enacted carbon taxes. Denmark’s is $52 per ton of carbon on coal and oil burned in power plants. Denmark’s gasoline tax is equivalent to $300 per ton of carbon — typical for Europe. The twelve nations of the European Community are discussing a carbon tax that would raise the price of natural gas by one-third, diesel oil by 11 percent, electricity by 13 percent, and coal by almost 60 percent.

One industry group thinks a carbon tax is a terrific idea — the producers of nuclear power, which does not burn carbon. But if we become rational enough to correct the externalities of fossil fuels, we should correct nuclear externalities too. That means removing government subsidies and charging a hefty tax on the generation of radioactive wastes.

Then, and only then, could we sit back and let the market make energy decisions. For the first time, it would be doing so on the basis of full and unbiased information.

multimedia

Quotations

About The Donella Meadows Project

The mission of the Donella Meadows Project is to preserve Donella (Dana) H. Meadows’s legacy as an inspiring leader, scholar, writer, and teacher; to manage the intellectual property rights related to Dana’s published work; to provide and maintain a comprehensive and easily accessible archive of her work online, including articles, columns, and letters; to develop new resources and programs that apply her ideas to current issues and make them available to an ever-larger network of students, practitioners, and leaders in social change. Read More

Newsletter Sign Up

DMI will be producing an E-newsletter with news from the organization, updates on the work of our fellows, and more. Sign up here if you'd like to hear about what we're working on.